They say that this is the most wonderful time of the year. Well, at least that is according to a Christmas song by the ever-popular American crooner Andy Williams. I have to say I agree, especially, if you happen to be a shopkeeper or, like me, have interests in retailing stocks. Once a year It is reckoned that some retailers can generate as much as half of their entire years’ sales over the last three months of the calendar year. It is, therefore, vital that they get their Christmas trading strategy right. After all, Christmas only happens once a year…
They say that this is the most wonderful time of the year. Well, at least that is according to a Christmas song by the ever-popular American crooner Andy Williams.
I have to say I agree, especially, if you happen to be a shopkeeper or, like me, have interests in retailing stocks.
Once a year
It is reckoned that some retailers can generate as much as half of their entire years’ sales over the last three months of the calendar year. It is, therefore, vital that they get their Christmas trading strategy right. After all, Christmas only happens once a year – doesn’t it?
On a recent Christmas foray through the popular malls in Singapore, I couldn’t help but notice just how busy the shopping centres were. But I also couldn’t help noticing how many retailers were offering generous pre-Christmas discounts.
Really? Is it really necessary for shopkeepers to discount prices so heavily, when Christmas should be a sellers’ rather than a buyer’s market?
That got me thinking.
Where’s the inflation?
Where is all the inflation that we are supposed to be experiencing, as a result of the swathes of money magicked by central banks? Wasn’t Quantitative Easing by the Federal Reserve, the Bank of England and now by the Bank of Japan supposed to stoke inflationary pressures?
Truth is QE has boosted prices. It has driven up bond prices, commodity prices and property prices. It has also lifted share prices around the world. But it seems that it has had the opposite effect on retail prices, for now at least.
Ultra-low interest rates, it would seem, has allowed many marginally-viable businesses to survive. If the cost of borrowing was higher, some of these companies could quite easily have gone to the wall.
But because low interest rates have enabled them to stay in business, they are adding to the already oversupply of goods and services, which in turn is depressing prices. It is straightforward supply and demand economics. That is, if economics can ever be described as either clear-cut or uncomplicated.
Inflation or deflation?
The noticeable lack of inflation, though some might go so far as to describe it as disinflation or even deflation, can be as perilous as rising prices for businesses. If you think about it, inflation and deflation are just different sides of the same coin.
Warren Buffett once said that one of the most important attributes of a business is pricing power. He said that if a company has to hold a prayer meeting before raising prices by 10%, then that could be a sign of a terrible business.
In the case of deflation, though, it is not the ability to raise prices that separates good businesses from terrible ones. Instead it is whether it can resist cutting prices while others are slashing theirs that can provide clues about a company’s pricing power.
Luxury goods retailers, for example, have resisted cutting prices. Wannabe brands, on the other hand, don’t quite have the same luxury.
The same goes for food producers. Food manufacturers that command strong brand loyalty don’t have to reduce prices to drive sales growth. But producers of lesser brands have little choice.
Real Estate Investment Trusts with properties in prime locations don’t have to cut prices to attract tenants, either. They can afford to adopt a take-it-or-leave-it approach.
Are you ready?
Currently, there is considerable interest in the timing of America’s decision to raise interest rates. When that happens, there could be considerable disturbance in markets around the world.
But that is alright. It is a sign that the world is gradually returning to normal – a world where good businesses and well-prepared economies will survive.
In times like this I always ask myself whether the companies that I invest in will be better or worse in five or ten years’ time. You can do the same too.
So ask yourself whether you think companies such as SingTel (SGX: Z74), DBS Group (SGX: D05), SIA Engineering (SGX: S59) and Keppel Corporation (SGX: BN4) will be better and stronger over the next decade?
We in Singapore have nothing to fear.
A version of this article first appeared in Take Stock Singapore.
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